Whole Foods Downgraded: Everybody Hurts, Even the Rich

By Avi Salzman

Jefferies analyst Scott Mushkin downgraded Whole Foods Markets (WFMI) today on concerns that the increasing cost of gas and other items is making even the average Whole Foods customer start to question her spending habits. Shares of the high-end grocer fell 5% in afternoon trading, even as other analysts gave the company more bullish reviews ahead of its Wednesday earnings release.

Mushkin has been doing store surveys and talking to Whole Foods’ competitors to suss out whether the company can continue its meteoric rise. His research “suggest[s] upside to sales has become more limited.”

“Indeed, while Whole Foods’ customer tends to be more upscale, they apparently have not been completely immune to the surge in everyday expenses. This seems to be limiting additional sales acceleration, something we believe is needed to push the stock meaningfully higher,” he wrote.

Mushkin’s Buy rating was predicated on the company accelerating comparable store sales, something he now sees as much less likely. Even taking into account today’s drop, the stock is trading at 32 times forward earnings estimates, up 18% this year. “With the stock up significantly, further appreciation seems limited.”

But Susquehanna Financial Group analyst Bob Summers noted this morning that the options market is pricing in a high-single-digit move for the stock after earnings, and that the company has repeatedly grown comps and managed expenses successfully.

“By 2012, we envision a company that will be virtually debt free, with accelerating unit growth funded by internally generated cash. We continue to believe investors are underappreciating Whole Foods’ earnings potential and are comfortable with our $1.77 FY11 and $2.01 FY12 EPS estimates, but believe further upside exists,” he wrote.

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